Democrats Agree – Democrat Policies Caused California Financial Crisis

brown Willie Brown, former State Speaker and also former Mayor of San Francisco, made a surprising interview this week.  In an unusual interview,  he acknowledged that his Democratic political agenda is largely responsible the the financial meltdown here in California.

His quotes in the interview are jaw-dropping.  Not only does he admit that the spending policies threw California into massive debt, but he also admits that he, and the other legislators did this without really having tried to analyze the effects of the laws they were implementing.

Here is a nice quote,  "I had actually participated in moving legislation to reduce the retirement age for teachers and I did it with great pride and I created it in my resume as one of my great achievements… Nobody took the time to do the analysis that would have persuaded us we needed to add money to make it work”

Well, that’s good to know.

He goes on to be fairly self-critical, “I may have been one of the key architects of many of the things that have created a challenge for my successors.”

So there you have it – even Willie Brown knows that Democrats are the architects of our problems.  But Brown couldn’t do it alone – it took all of them – much like Obama is doing now – to systematically ignore logic and common sense in favor of grabbing votes by promising to spend money on programs we know we cannot afford.

Schwarzenegger’s Tax Reform

Last year, Governor Schwarzenegger issued executive order S-15-09 establishing a commission to analyze California’s tax options.  The report came back last September.  It looks very promising to me. 

Highlights:

  1. Addresses state revenue stability and broadens the tax base for California.
  2. Cuts personal income tax nearly in half for almost all Californians.
  3. Cuts sales tax in half.
  4. Implements a new tax system (BNRT) which would be ~1.5-4% of net receipts for all business.  This system replaces the current corporate tax of up to 8.8%, which is eliminated.
  5. (Optional) Establish a rainy-day fund for dealing with economic fluctuations to further reduce annual financial variances.

Obviously, everyone likes the tax cuts.  But who pays with this BNRT (Business Net Receipts Tax)?  Everyone pays it.

The problem is that if you look at state revenues, we keep increasing income taxes (now the highest in the nation) and sales tax (also the highest in the nation).  But these taxes don’t cover all consumption.  And as consumption trends change over time, the revenues from these streams change.  The commission notes correctly that this is why the government has such feast-or-famine income streams each year.

staterevenuesFirst, we can look at state revenues.  You can see the rapid growth of the income tax.  You can also see that sales taxes, as a percentage of revenue are dropping.

 

 

salestaxNext, just what percentage of sales are subject to taxes?  Over time, you can see most business in California is not subject to the tax.  This creates a disproportionately high tax on some industries while there is no tax on others.  And, you can see that spending patterns among Californians change over time.  This is why the current tax system hasn’t been able to keep up with the times.

The critics are upset because the new tax side-steps their current favorite tax-breaks.  Any massive tax change is going to make someone unhappy.  But is the new tax proposal broad and fair?  Absolutely. Nonetheless, critics still cite that the new system gives breaks to the rich.  But that isn’t true.  Who consumes the most in California?  The rich.  The rich will far-and-away pay the most under this system, just as they do today.

I do have a couple of criticisms.  First, I don’t understand the elimination of the corporate tax.  The corporate tax today discourages businesses from choosing California – so eliminating the tax is commendable.  But, I don’t think it needs to be completely eliminated – reducing to 1 or 2% would pacify critics and still leave California competitive.  Second, the exact rate of the tax is a little dodgy.  I’m worried that both the tax rate and the ability to collect are still too unknown.

By the way, lawyers hate the proposal.  Why?  Because the services they sell, which are currently untaxed, would now be taxed.  Don’t be surprised if a lawyer says he hates it.

Schwarzenegger Knows How To Fix California

Unlike most politicians who live in denial, Schwartzenegger is willing to admit that California is on the same path as Greece.  Unless we change, we know we’re in trouble.

There are two potential answers to California’s budget problems:  cut spending or increase revenues.

The problem is that we can’t increase revenues.  With unemployment in California is at 13% right now, we simply don’t have the workers to tax.  But even if we did,  we already have the highest sales tax of any state in America.  We also have the highest personal income tax rate of any state for middle-class people (9.55% of everything over $50K!).

If you break down the state budget, it comes down to two choices:
      a) cut education
      b) cut welfare type programs

Unfortunately, we have to finally decide on one or the other.  We can no longer afford both.  Which do you want?  Cut education further than we’ve already cut it, or cut entitlements?  Schwarzenegger knows what he is doing.  If you don’t approve of his current plans, you can’t blame him for cutting education.

Who Would Be Crazy Enough to Lend Greece Money?

greece As the IMF prepares to hand $150B to Greece, you’ve got to wonder what they are thinking.  Greece has demonstrated that it is a financial mess.  When you lend someone money, you’ve got to see a path where they can pay you back, right?

First there is the issue of spending.  Greece has been spending crazy amounts of money for decades.  While the IMF hopes to require spending cuts, what confidence can any investor have that Greece will implement them?  Sadly, the Greeks have been caught lying about their finances in the past.  How do you lend money to a country where the leaders are fraudulent?

Second, there is the issue of revenue.  The IMF wants Greece to raise taxes on its people.  That seems like a good idea, except that Greece has had policies of not enforcing their own tax code for years.  Why would any investor believe that Greece will suddenly change, and that its people will finally start paying their bills?

So for you would be lenders out there, Greece has huge risk both in terms of cutting its spending and also in terms of increasing its revenues.  In my view, lending money with any expectation of payback is simply wishful thinking.  It’s not going to happen.

Finally, who are the lenders then?  Well, as usual, it all comes back to the United States.  While the US isn’t getting the full  $150B for this one, the US contribution as being part of the IMF will be a staggering $39B.  That’s right, while the Greeks are selfishly protesting tax increases in the streets and not even paying their own taxes, America is going to take another $39B loan to help them out.  Nice.  For the record, that means every working American gets a bill for ~$278.

You can guess what I think:  let them fail.

Rewarding Failure

The problem with the Obama administration rewards failure and punishes success.

But what happens to the Americans that managed to succeed and make money rather than lose it?  Obama chastises this group as the greedy, evil rich people.  And to punish these people for being successful, Obama increases their medicare taxes, increases their income taxes, increases their capital gains taxes, limits their itemized deductions, and even hopes to implement a windfall tax if you’re just too damn successful.   That’s 3.8% + 3-4% + 5% + reductions in itemized deductions.  So in addition to the over 50% that you already pay in taxes, Obama wants to take another 12.8%!

And don’t forget – the state of California plans to increase taxes too…

Let’s put incentives in for being a benefit to the system rather than benefits for being a drain on the system.

Taxes: The Myth of “Deficit Neutral” Spending

Obama likes to say that new spending should be “deficit neutral”.  That sounds like a great idea!  After all, nobody wants to be financially irresponsible, right? The idea that we account for new spending is a good one, and it is better than not accounting for new spending.  But, it’s yet another politician’s con job.

Let’s use a simpler example.  Let’s say you have a monthly income of $1,000.  And let’s say you’re carrying a debt of $100,000 for your mortgage, for which you pay $537 per month.  You also tend to spend about $500 on your other living expenses, so all in all you’re losing money each month.  Since a tax-hike is like a giving the government a raise, let’s say that one day, you get a raise of $200 per month.  You could decide to save that money.  Or, you could decide to go buy a car (healthcare) for $20,000 and a $200 per month payment.  All-in-all, you convince yourself, you are “deficit neutral”.

Here is how it looks:

Before the Raise

After the Raise
Save

After the Raise 
Buy a Car

Debt $100,000 $100,000 $120,000

Income

$1000

$1200

$1200

Mortgage

-$537

-$537

-$537

Expenses

-$500

-$500

-$500

Car

$0

$0

-$200

Net

-$37

$163

-$37

As you can see, although we decided buy a car, we are still “deficit neutral”.   Our income has gone up, but our incremental losses each month have not.

But what happens 5 years down the line?

  Saved the Money Bought the Car Never even got the Raise
Total Debt -$85,314 -$99,981 -$85,314
Cash in the Bank $9,780 -$2,982 $-2,982

After time passes, we now see that “deficit neutral” does not mean we didn’t create a more dire financial picture.  Sure, we are now the proud owners of a 5 year old car.  But to do so, we’ve amassed 17% more debt, and have nothing in the bank.  Ironically, of the 3 financial outcomes, you can easily argue that we would be better off to never even get the raise than to buy the car.  Can you imagine saying to your boss, “Please don’t give me a raise – it will send me into more debt!”?

Finally, how often do you get a large raise?  Can the government give itself a raise any time it wants to?  The answer is – not very often.  Sure, the government can give itself a raise by way of more taxes, each time we do so, we decrease economic growth.  As such, the government needs to choose very wisely when it does tax and for what purpose.  By having increased our taxes to pay for healthcare, Obama will need to raise even more taxes to pay off our debt.

So now the question is – what is Obama’s plan to get to financial responsibility?  He seems to think “deficit neutral” is responsible.  But, as you can see, that’s not the whole picture.   I know this is obvious to most readers of this blog – sorry for being pedantic.

** The numbers above are all based on values I picked for interest, periods, etc.  I chose reasonable numbers – 5% interest, a little more for the car, only 10% for credit card debt, etc.  This was just the first set of numbers I used.  Regardless of the numbers you use, realistic-ish scenarios yield similar results.

Who Wins With Prop 13?

This article about effects of Prop 13 has been getting sent around.  It’s worth reading and highlights a case which most people think is unfair.  I agree, Prop 13 is completely unfair.  But would I change it?  Absolutely not!

The premise underlying the article is that somehow California has a top-line problem – not enough revenues.  But California is the single largest taxing state – generating $98B annually from taxes for a mere 37million inhabitants.  On a per-capita basis, California isn’t the most taxing (ranking #10), but our large size should offer economies of scale for infrastructure, right.  Unfortunately, California is so mismanaged that it offers no such efficiencies.

So I’m thankful for Prop 13.  We need more laws which prevent the state from taking money it doesn’t need.   The crisis in California is not caused by failure to tax enough.  Forbes ranks California as the most taxing state second only to Hawaii (is it a surprise that it costs more to live in a tiny, tropical state hundreds of miles off the coast from any other state?).  But while Hawaii gets the "highest bracket” award, that only kicks in when you make $200K/yr.  California taxes any earner making more than $47K at 9.55%.  If we ranked states on highest income tax for those making $50K/yr, California is far-and-away #1.

And I haven’t even mentioned California’s business-unfriendly tax rates.  Just trying to start a business in California costs thousands of dollars.  Why?  Don’t we want more business and jobs here?  It’s insane.

Bottom line:  Fix the California spending problem, not the California income problem.  Cut all spending, across the board, by 60%.  Would anything bad really happen?  I don’t think so.

A Better Approach To Fixing Healthcare

Pretty much everyone wants a better healthcare system.  The desire for change stems from two basic concerns:

  1. We want every American to be have insurance (e.g. you shouldn’t have to pay for your own healthcare if you can’t afford it)
  2. We think the cost of healthcare is too high

The major proponents of change would also have you believe that America has a horrible healthcare system because we have higher incidence of newborn fatalities and a lower life expectancy than other nations.  They say these are signals of a failed healthcare system.

But are they?  I’ve argued before, and I’ll argue again, that the cause of poor health in America has nothing to do with our healthcare system.  When you need critical care, there is no place better than America to get it.  America also is the runaway leader in healthcare research and generates more Nobel prize winners in Medicine than any other country.

So why do we die early?  Jamie Oliver, winner of this year’s TED Prize tells you why.  And the cost of the fix is cheap, and has nothing to do with our healthcare system.  The problem is us.  Changing insurance won’t make us live longer.  He’s a great speaker, I hope you’ll watch.

How to Get Our Democracy Back (Lessig is Wrong)

congressforsale Since the Supreme Court Ruling on corporate limits last month, a lot of people have been discussing the role of lobbyists, special interests, and those that try to buy undue influence.  I’m ecstatic that this is gaining attention, because it doesn’t matter if you are liberal or conservative, I have yet to meet anyone that isn’t against this growing source of corruption in America.

Obama seems to think the ruling was wrong, and attacked the Supreme Court in his State of the Union address.  Lawrence Lessig wrote a nice article about our general lack of trust in congress, spurred by lobbyists and corruption.  He recommends the Fair Elections Now Act, which is good, but won’t prevent the corruption we have today.

Lessig follows the obvious answer – which is more spending caps and more legislation.  And while these are good ideas, they won’t work, because they don’t address real problem:

The government distributes too much money.

Why has the amount of money spent on lobbyists more than doubled in the last 10 years?  Because our government is expanding.  When we give money to the Federal Government to spend, special interests line up to assist with the distribution of those dollars.  If we just don’t let the Feds get the money in the first place, the lobbyists will disappear.   But as long as the money is there, the lobbyists will remain.

On the surface, it seems like contribution caps should be enough.  But the reality is that there are just too many loopholes.  Although the limits are allegedly $5,000 per candidate per year, it doesn’t take much browsing through OpenSecrets.org to discover that individuals, PACs and corporations are all able to openly donate much more (example1, example2, example3).  Unfortunately, legislation to close these doors is difficult at best, and impossible due to freedom of speech at worst.  There are so many back-door mechanisms to donate money (e.g. “hey, I’ll buy you a ticket to come talk here in San Francisco”, or “I can run a TV show about you”, or “I can write an article for you in my paper about how bad your opponent is”), that it just isn’t realistic to expect we can possibly close them all.

Special interest groups have figured this out.  They’re not just buying a few candidates, they’re now buying all of them.  Consider AT&T, for example, who donated $4.5M to candidates last year.  If you believed that the $5,000 per candidate contribution limit applied, that would mean they would donate to ~900 candidates.  In actuality, they donated to ~430.  And since there are only ~500 Congressmen,  that means they donated to most of them!  And AT&T is not alone.  The National Association of Realtors, and practically every union are doing exactly the same thing:  buying “access” to more than half of Congress.

Once we realize that centralizing our spending through the Federal Government is the problem, two simple solutions emerge:

  1. We need to give the government less money to spend.
  2. When we do give money to the government, we should federate it through states and local agencies as much as possible.  Don’t leave decision making power in Washington, where a small number of politicians can be influenced.

This realization also highlights why Obama’s entire strategy leads to more corruption, not less. Obama spent over $700B last year in “stimulus”.  Did he really believe that he could distribute such a massive amount of spending without calling out the lobbyists in droves?  Does it really surprise him that when he announced that he wanted a federal takeover of federal student loans that Sallie Mae would kick up it’s lobbying to the tune of $8M?

The unfairness and corruption is caused by the lobbyists and campaign contributions, that is true.  But they are not the root cause, and they are impossible to stop without violating our own liberties (hence the Supreme Court ruling).  When all money flows through a small funnel in Washington, corruption increases.  Take the money back, federate our spending across the states and local governments, reduce spending and reduce taxation, and the corruption will decrease.

Saving $7.2T by the year 2421

I am so sick of hearing claims like, “this bill will save $200B by 2020”.

What does that mean?  It usually means that in order to trump up the savings benefit, the politician multiplied the annual savings by 10.  Or they did inflation adjustment, or added debt interest, or other complex additives to make the savings look bigger than it is.  At the end of the day, it is a bogus number.

I just received a letter From Senator Diane Feinstein claiming a bill will save “$176 billion from 2014 to 2023”.  What that really means is an annual savings of roughly ~$17.6B.  That’s nice, but when put in perspective to the $3.6T spending package being proposed for 2011, it’s a mere half of one percent of spending.  And she calls this reform.

It’s not just the democrats doing this – all of them seem to use this kind of lying mathematics in order to fool their constituents.  It’s dishonest at worst and deceptive at best.